Did the SEC Collaborate with FINRA in the Madoff Investigation?

January 12, 8:31 AMSF Financial Fraud ExaminerPaul Springer

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The question headlining this post comes from Peter Chepucavage, a former Securities and Exchange Commission attorney who now works with Plexus Consulting Group in Washington, D.C.

Chepucavage has decades of experience with securities law and regulation, and his opinion is often sought in matters relating to the development and enforcement of securities regulations.

While the SEC is getting endless grief for its past failures to find any wrongdoing by Madoff Securities, no one in the media seems to be wondering about whether FINRA might--or might not--have been asked to work with the SEC in this matter. And especially with respect to the question of whether the broker dealer staff had an obligation to check up on what the CEO was doing in the firm's discretionary account investment and advisory business.

Those of you who are not ardent fans of securities regulation may know FINRA (Financial Industry Regulatory Authority) in its former incarnation as the NASD (National Association of Securities Dealers.

FINRA's mandate is more clearly focused on brokerages than the SEC's, which is inclusive of various other players, such as issuers, hedge fund managers, and individuals who commit securities fraud outside the context of employment in a brokerage.

Chepucavage simply notes that there is at present no information as to whether the SEC asked FINRA for a "second opinion" in any of its dealings with Madoff. 

Certainly FINRA's investigatory staff would be at least as well versed in options strategies as the SEC's attorneys. 

As someone who worked on the options exchange floor in San Francisco, I can tell you that the Harry Markopolos critique of Madoff's options strategy provides over a dozen cogent reasons to at least consider the possibility that Madoff was running a Ponzi scheme. Per the Markopolos letter currently posted at the Wall Street Journal site, Markopolos brought his concerns to the attention of the Commission in 1999.

The Commission had been warned of problems with the Madoff firm at least as early as 1992.

And no one seems concerned that Bernard Madoff's brother, Peter Madoff, served with the NASD in several capacities--before he went to work in Madoff's compliance office. And in 2001, the NASD put Mark Madoff, another of Bernard's sons, on its National Adjudicatory Council, which reviews disciplinary decisions made by FINRA.

So what is the story? If the SEC just sat on the information it had, that would make for a more  productive avenue of inquiry than tormenting mid-level SEC staffers.